The IMF worsens its forecast and announces a 4.9% drop in the world economy by 2020

The IMF has thrown a new jar of cold water on the world economy this Wednesday. The agency has revised the growth forecasts it launched in July and made them worse. The organisation's economists predict a 4.9% drop in the world economy by 2020 and say the effects on employment will be catastrophic. "The deep decline in activity will be accompanied by a brutal blow to the global labour market," explains the Economic Outlook report.

The reduction in working hours in the second quarter of the year is likely to be equivalent to a loss of more than 300 million full-time jobs. In this new document, the IMF stresses the exceptionality of the current situation and assures that it is an unprecedented crisis. Uncertainty about further outbreaks prevents analysts from making predictions about how the economy will behave in the coming months. 

"About 75% of countries are now reopening as the pandemic intensifies in many emerging and developing markets. Several countries have begun to recover. However, in the absence of a medical solution, the strength of the recovery is highly uncertain and the impact on sectors and markets is uneven," said Gita Gopinath, IMF chief economist, at the virtual launch of the new report on Wednesday. 
 

Of the large economies, only China will remain positive, with modest growth of 1%, two-tenths of a percent less than expected in April. The United States will fall to 8% this year, two points more than the figures published two months ago. Japan will fall by 5.8% compared with the 5.2% contraction forecast in April, and the UK will contract by 10.2% compared with the 6.5% estimated three months ago. "The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and recovery is projected to be more gradual than previously expected," the Fund said in its report.

The IMF has pointed out the weakness in private consumption as a result of "the combination of a great adverse demand shock and a cautious rise in savings", as well as in business investment due to "the postponement of capital expenditure given the high uncertainty". In 2021, the forecast is now for overall growth of 5.4%, four tenths of a point lower than estimated in April.

Next year, the United States is projected to grow by 4.8%, China by 8.2%, Japan by 2.4% and the UK by 6.3%. Global trade will be one of the most affected sectors, and is expected to close 2020 with a contraction of 11.9% in the face of significantly lower demand for goods and services, including tourism, and to close next year with a gradual rebound to 8%.

For Latin America and the Caribbean, the agency led by Kristalina Georgieva has already anticipated that economic activity will plummet 9.4% this year due to the impact of the coronavirus pandemic, 4.2 points worse than its April estimates. "In Latin America, where most countries are still struggling to contain infections, we project that the two largest economies, Brazil and Mexico, will contract by 9.1 and 10.5 percent, respectively, by 2020," the IMF details in its report. Looking ahead to 2021, the IMF has anticipated that the Latin American region will grow by 3.7%, 3 tenths more than predicted in April, a promising figure but insufficient to recover the activity lost during this year.

Stock markets suffer

The European equity market responded with falls to comments by the European Central Bank's (ECB) chief economist, Philip Lane, who has predicted that the economic recovery process, despite some initial positive signs, will be fairly gradual and that consumers and businesses will take time to recover from the impact of the confinement. The markets fell further on the news that the United States is considering applying new tariffs on products from France, Germany, Spain and the United Kingdom worth some $3.1 billion (about '2.748 billion).

All these factors have not been offset by the improvement in the business climate in France, which in June recorded the highest monthly rise in the historical series, nor by the recovery of business confidence in Germany (according to the Ifo index). The New York Stock Exchange changed course on Wednesday compared to the previous day due to fears of a second wave of the COVID-19, as the average number of new cases per day in the US was once again above 30,000 due to the upturn in California, Florida, Texas and Arizona, which together account for almost half of the country's infections.

The price of Texas intermediate oil (WTI) fell by 5.87% to 38 dollars per barrel after the US government announced a larger than expected increase of 1.4 million barrels in national crude reserves. Brent crude, the benchmark in Europe, was down 5.37% on the London futures market to $40.34. The euro was down after the US threatened some European countries with new tariffs on their products and was exchanged at $1.11269.